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The “Margin of Safety” concept can be dated all the way back to the 1930s, first mentioned by American economist and author, Benjamin Graham. In the case of investing, it means you should always leave room for error, or the possibility that your potential outcome may not be precisely right.READ THE ARTICLE
Make room for wrong: This idea is especially applicable when it comes to personal finance. As you plan for an unknown future, your Margin of Safety is that you are never too precise with your assumptions, and instead, prepare for a variety of outcomes. When building a long-term financial plan, this prevents you from basing all decisions around prediction and more around a range of key variables (projected retirement date, life expectancy, inflation, tax rates, etc.).
Consider permanent loss: Much like any other planning concept, however, this approach still leaves room for error, as you will never be able to account for every potential outcome. On the other hand, you can still attempt to plan for uncertainty by thinking broadly about risk in your portfolio and considering extreme economic scenarios. Then, plan for those scenarios by diversifying your assets across classes that, as stated here, exhibit little, none or even negative correlation to one another.
My two cents: You shouldn’t seek “perfection” in planning. Instead, exercise common sense as you assess your risks and maintain flexibility to adapt should those risks come to fruition.